Sen. Sam Brownback has proposed exempting auto dealers who lend to their customers from regulation by the Consumer Financial Protection Agency created in the financial reform bill. The auto dealers object to the supervision because they were not at the center of the financial crisis.
However, the arguments for including them in regulation are clear: One is a history of abusive lending by some dealers, and the other is the migration of pernicious practices to unsupervised sectors of the market -- if all other areas are under watch, people looking to engage in predatory lending or securitization schemes will migrate to auto lending. It comes down to this: If you're lending people tens of thousands of dollars, you should have to follow the same basic underwriting practices as any other lender.
Brownback, though, has picked a fight with the Pentagon, which has made clear that the military supports this amendment after seeing many service members and their families taken advantage of by car dealers. Financial distress of this sort doesn't help military readiness, especially given all the other challenges faced by military families.
Currently, people who borrow money from dealers to purchase cars spend $20 billion a year in excess interest, according to the Center for Responsible Lending. The Cambridge Winter Center, a financial research institution, estimates that the auto loan market is larger than the credit card industry. Brownback even misquotes Raj Date, the Winter Center's director, in a letter to the Pentagon, which led Date to send out another statement to reporters, criticizing Brownback's arguments and noting his support for including auto dealers. In the statement, Date went so far as to say that it is "my strong opinion that only those auto dealers that cannot play by honest rules would exit the business." Good riddance.
What's surprising to me, though, is that Brownback -- who is retiring this year -- has chosen to expend his political capital on what is likely the final piece of major legislation during his career by carrying water for auto dealers who object to fair lending rules rather than siding with the Department of Defense.
-- Tim Fernholz
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